News & Research Archive

Folks, we just had the equivalent of a 9.0 financial earthquake, this one with an epicenter in New York City and London, and it was all man-made. The aftershocks are being felt throughout the world, and there will be aftershocks aplenty. Where was the adult supervision?

A number of years ago when I was living in Los Angeles, it was a mid-November Saturday afternoon, very dry, and the Santa Ana winds were blowing. All of a sudden, I heard screams of Fire Fire! The roof of the house to the rear of my backyard was engulfed in flames. So I scampered to my rooftop with garden hose in hand, ready to protect my hearth and home. About 20 neighbors soon arrived in my backyard to watch LA’s finest firefighters bring the fire under control. I descended from my rooftop perch having done my job. We survived.

I learned that two boys belonging to a neighbor about 100 feet down the block had been playing with matches and set a tree on fire. In the dry heat with winds blowing, sparks blew across to our neighbor's house, and thus our neighbor lost most of his house. It could have been the entire neighborhood, if not a large part of LA.

Two important points come to mind. Where was the adult supervision? Fortunately taking affirmative action prevailed over panic and fear.

Too bad that both earthquake and (wild) fire metaphors seem appropriate to describe what is going on in the financial, real estate and other markets.

Basics

Mayor Newsom spoke at a Business Times breakfast a week or so ago. He rattled off a bunch of statistics, which impressed me.

Since 2004, over 475 technology companies have committed to approximately 5.6 million square feet of space

Through the first eight months of 2008, 34 companies have relocated, expanded or announced their intention to do so in San Francisco

The City has experienced 20 quarters of net office absorption (soon to be interrupted)

First quarter 2008 sales tax revenues are up

Conde Nast Traveler Magazine has ranked the city of San Francisco as the top travel destination among US cities for the 18th consecutive year

There were 16.1 million visitors to San Francisco in 2007, and they spent an estimated $8.2 billion

My favorite – 2/3 of the jobs being created in the Bay Area are in San Francisco

Source: Mayor's office of Economic and Work Force Development – Economic Data Book

There are some basic economic supports for the San Francisco economy. Yes, we are going to feel the effects – probably for some time – of the financial earthquake, but I would rather be here than New York where the financial community represents a much bigger piece of the economic pie, or cities like Detroit that were already experiencing hard times and scandal, or the many smaller communities just 25 miles or so outside of San Francisco where subprime and Alt A ran wild.

Perspective

I get that people are scared, and in shock: but the point is not everyone. I did an informal survey among real estate agents last week. I asked two questions: (1) Do you perceive a slowdown in traffic for re-sales? (2) Do you perceive a greater hesitancy on the part of buyers? Yes was the answer to both questions by the overwhelming majority of those who answered; but not all. One agent characterized the traffic situation as - slightly less traffic for B properties and strong traffic for A properties - some buyers feel that this market is the time to get a great deal.

My sense is that as long as the media, politicians and others who feed off our attraction to drama stir that pot, 80%/90% of buyers are not going to do anything for awhile, and I have no idea how long that is going to be. But I also sense that 20%/10% will take action based on a real need to buy. Either because they have made a commitment to relocate to the City for a new job or are empty nesters and have already made a decision to move. There are also investors who have saved up for rainy days. Remember, as the Dow Jones plummets some 300/400 points on any given day, there is always a buyer on the other side of every trade. Another data point – some 10% to 15% of new listings are going into contract the same week that they are listed! Some people out there are ‘pulling the trigger’ when they see what they want.

The majority are probably concerned that the earth will open up and engulf all of us. The more astute see an opportunity. We seem to prevail after countless cycles of earthquakes, wildfires, and economic disasters.

Bright Spots

Buying residential real estate is not a short-term trade. One needs at the very least a 5 to 7 year horizon. If we review average San Francisco prices for both single-family homes and condominiums for the last 20 years, had you bought in any year, you would have experienced appreciation over the ensuing 5 to 7 years. Yes, I know this is history, and the current situation is dire. Though we are not all the way through 2008, for the nine months to September 30th, year over year, the average price of single-family homes in the City is flat while condominiums are up 2.4%. I would have guessed the opposite. Certainly some neighborhoods of the City are suffering mightily, for example, homes in Bay View, Hunters Point and Visitacion Valley at the southern end of the City are off about 19% and probably pulled down the single-family average, but as whole the City is holding up so far.

Take, for example, South of Market St. where some would say excessive building has taken place over the last few years. The good news for those who have recently bought a condominium here is that their property value is probably going to experience a shot in the arm as a result of the current financial crisis; because there is going to be less building in the next three to five years. Some projects will be cancelled outright while others will be delayed. Lenders are going to sit on their money until their collective confidence and capital are renewed. Also, the cost of construction is up significantly and there will really be no significant projects built until both the financial situation stabilizes AND sales prices go up. Fewer condominiums for sale, even in the face of lesser demand, probably bodes well for today’s buyer. Add in the fact that (the majority of) sellers are also nervous, means that attractive deals are to be had in the midst of this troubled market.

My counsel to buyers, no matter the San Francisco neighborhood, take your time to learn and understand the basics of San Francisco residential real estate and connect with a trusted and savvy agent who can negotiate and execute the transaction. My counsel to sellers is that there are in fact buyers in this market, but you need to price your property really really attractively – at a price that you would buy it in this uncertain market.

Written by: Malcolm E.A. Kaufman

E-mail: mkaufman@mcguire.com

Starboard TCN is posting this article on its website and blog with Malcolm E.A. Kaufman's approval.